The Sensex dropped yesterday by the most since June 24 after a three-day rally drove its valuation to a three-week high. The jump in West Texas Intermediate crude may stoke investor concerns over inflation in a country that buys about 80 percent of its oil from overseas. Higher oil and gold prices helped boost India’s current-account deficit to a record 6.7 percent of gross domestic product in the fourth quarter.

“The Reserve Bank of India may need to shift focus back on inflation management from reviving economic growth if things worsen,” Rajendra Wadher, a director at PRB Securities Ltd., said in a phone interview today.

WTI futures surged as much as 2.4 percent in after-hours trading today to $ 102.02 a barrel as a political showdown in Egypt escalated, bolstering concern Middle East oil shipments may be disrupted. India’s current-account deficit narrowed last quarter to 3.6 percent of GDP.

HSBC Holdings and Markit Economics are due to release today a June purchasing managers’ index for the nation’s services industry. The May reading was 53.6, above the level of 50 that signals growth.

Higher Valuations

The Sensex has fallen 4.1 percent from a two-year high on May 17, as the prospect of reduced U.S. monetary stimulus prompted investors to pull money from emerging-market assets. The gauge rallied 5.5 percent in the three days to July 1 as the government agreed to raise natural-gas prices as part of a policy overhaul to revive economic growth.

That rally drove Sensex valuations to a three-week high of 13.1 times projected 12-month profits, data compiled by Bloomberg show. The ratio fell to 13 times yesterday, compared with the MSCI Emerging Markets Index’s multiple of 9.7.

Overseas funds bought a combined $ 204.8 million of Indian shares on June 28 and July 1 after a 13-day streak of net sales, data compiled by Bloomberg show. Foreign investors sold a net $ 1.76 billion last month through June 27, the data show.

To contact the reporter on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net

To contact the editor responsible for this story: Michael Patterson at mpatterson10@bloomberg.net